實耐寶 (SNA) 2003 Q1 法說會逐字稿

Good day, everyone and welcome to today 's Snap-on, Incorporated first quarter results conference call. Today's call a being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. William Pfund.

Good morning, And let me welcome everyone to Snap-on first quarter 2003 earnings conference call. With me today are Dale Elliott Chairman, President and CEO and Marty Ellen Senior Vice President and Finance Chief Financial Officer . Dale will begin today's call with general comments about Snap-on's performance during the first quarter and update you on the progress Snap-on continues to make against our strategic priorities. Following my brief review of the operating details, behind your first quarter earnings, Marty will cover our financial priorities and discuss the assumptions behind your 2003 outlook. We will then open the call up for your questions. Consistent with policy and past practice, we encourage questions during this call. We will not discuss unclosed material information off line. Also any statements during this call the [inaudible] Expects, believes, anticipates or otherwise state the company’s plans or projections for the future are forward-looking statements. And as such, actual results might differ materially from those made in such statements. Additional information concerning the factors that could cause actual results to materially differ from those in the forward-looking statements are contained in the news release in 8K form report issued this morning by Snap-on and latest 10Q and 10K and other periodic reports filed with the SEC.

In addition, this call is copyrighted material by Snap-on, Incorporated. It is intended solely for the purpose of this audience. Therefore please not that it cannot be recorded, transcribed or rebroadcast without our permission. In addition, this call is being recorded and your participation implies your consent to our recording this call. Should you not agree to these terms, drop off the line. Let me turn the call over to Dale Elliott

Thank you Bill, and good morning everyone. During the quarter our performance was generally in line with expectations, which we shared with you during the last conference call. Sales were boosted some what with effect the currency translation. But overall currency effect had little impact on earnings. Much of the savings being produced by from our restructuring and operational fitness initiatives were offset by higher plan cost such as pension expense and mega-active impact manufacturing impact due of inventory reduction. As a result, earnings were $.37 per share, which included $.03 of costs [inaudible] The economic environment continued to be a challenge for many of our operations. In general manufacturing activity remains at that time low level reducing demand for our hand and power tool in the industrial sectors. Future economic expectations also continue to be low and is reflected the continued generally weak sales for many bigger ticket products. Such as air conditioning, large diagnostics, and under-car equipment as lips and coalition repair.

Notwithstanding the overall weak economy, our dealer business continues to strengthen, both at the company level and at the dealer level. Sequentially, the year over year growth rate of sales improved. This reflects sales gains by dealers to end users and the progress made during the past year in improving the balance sheet of our franchisees. As I've said in the past, as Snap-on strives to improve our working investment terms, we also believe it is important to improve the working investment and financial performance of our franchisee base. And as illustrated by the numbers, we are making process. Snap-on has set five key priorities for 2003. And these are first, support the growth and enhancement of our dealer business. Continue our investment and developing productivity-enhancing products. Drive adoption of lean business practices across the corporation. Improve margins in spite of the weak economy. And continue to improve our working investment turnover. Marty will discuss in more detail the latter two points of margin improvement and working investment reduction. But let me discuss the first three points. In our dealer group the ‘more feet on the street’ program was implemented to both expand customer coverage and also to enhance the financial performance and sales success of our franchisees. It offers our dealers an opportunity to grow their business through second [inaudible] and second franchises with an emphasis on applying solid business principles to their operation. As you know we expanded our dealer network by just over 10% during the last two years.

Going forward, we expect to continue to grow the overall network but at the rate of 2 to 4% annually. Meanwhile we expect to continue the higher levels of training and development put in place during is past few years. Importantly, what has been accomplished for the second band opportunity, is the creation of a more responsive network available to take advantage of incremental changes in local marketplace dynamics. Individual dealers who were previously fully occupied, now have the means to service additional customers. With some of the current changes taking place in the marketplace, this provides our dealers and Snap-on with greeter capable to grow our business. In the dealer segment, we have several projects underway that are driving continuous improvement throughout the supply chain. Our goal is to move from a traditional manufacturers built-to-stock approach, to a more customer-responsive system based on demand. This is causing changes on how we coordinate and communicate between functions. We are incorporating this new thinking into our new product development process as well as our promotional and production planning.

It has caused us to change our merchandizing and product introduction approach, so that today we have specific marketing plans by branch, that provide greater flexible for dealers and improved inventory terms. Innovative products introduced in recent years have not only one award but also exceeded our sales expectations. This has created sales opportunities in a difficult economy, and provided us with gains and market share in certain categories. Last year, substantial progress was made against our new product sales target, with items introduced during the past three years contributing approximately 23% of sales compared to 15% in 2001.

This year, we expect to make further improvements in ramping up the sales contribution through the continuing roll-out of the modus diagnostic system throughout the US, and its introduction into Europe in the first quarter. We are also releasing our first diagnostic product in to the Japanese market. And there are also a host of hand and power tools scheduled for introduction worldwide under the Snap-on, BAACO, and Sue brands.

Recent introductions of new wheel aligners [ph], such as the John Dean Arrago [ph] system coupled with the wheel balancers and tire changers introduced in the past two years has resulted in our strongest product line ever. Major emphasis is being given to the accelerated implementation of the Snap-on business process and lean business tools. Near term, the support of these initiatives results in Snap-on taking actions which can reduce current reported earnings. However, these are necessary and appropriate steps needed to improve responsiveness and customers and position customers for Snap-on for long-term success. Our heritage Snap-on tools operation continued to make changes to transform itself for the benefit of the customer.

These actions are building our capabilities, while better aligning work processes and resources. We have made progress in a number of areas including improved production scheduling, more visible key performance metrics and important management changes.

Our results for the quarter reflect the internal transformation that has been taking place over the two years under our driven to deliver business process. As you knew, this process is built around three strategic principles: quality people, operational fitness, and profitable growth. It is the balance of these three principles that we believe that will produce sustainable value for our shareholders. And we are very encouraged by what we're seeing and the potential benefits that this process will unlock.

Our efforts around profitable growth and operational fitness are complimented by our emphasis on quality people. We have made significant strides in aligning performance metrics with our compensation plans, and in insuring that we have to right people in the right positions to drive improvement. During this same two a-year period, about 20% of the worldwide management leadership is new to Snap-on. But more than 60% of the team have new responsibilities.

We believe this combination of experienced people and new ideas provides us with the capability to execute or plans and to build shareholder value. I am confident we are on the right track. And with that, let me turn this over Bill Pfund, who will cover our first quarter performance.

Thank you Dale. Snap-on’s first quarter new earnings were $21.4 million or $.37 per share, in line of expectations. Overall net sales were up sales were up 6.5% for the quarter with most of the increase due to the favorable currency translation. Absent the currency impact, sales increased $4.5 million. I will cover the sales in greater detail in a moment when I discuss segment results.

Looking at consolidated gross margin as a percent of sales it was impacted a by a number of activities year over year. The most significant impact aside from the currency effect was $4.4 million dollars in under-absorbed manufacturing costs, caused largely by our efforts to reduce inventory levels, as well as some lower volume in big ticket diagnostics equipment. Additionally, there was a negative $3 million impact from unfavorable sales mix in the commercial and industrial group. As a result of higher sales in facilitation business which is a lower margin operation which did not offset the sales of industrial tools, which is a higher margin business. There were also $1.8 million for cost for continuous improvement actions, as we continue to take those actions appropriate to improve manufacturing processes, as well as a number of other general cost increases during the quarter. Partially offsetting these higher costs were a favorable impact from price realization and continued benefits from restructuring savings.

Operating expenses increased $8.8 million year over year excluding the $6 million of special items in 2002 in the $8.8 million of currency impact. The savings being generated from our prior year restructuring activities were offset by the higher cost of pension, other retirement and insurance costs, the $1.6 million increase in more feet on the street expenses and some other general cost increases. Net finance income increased $3.2 million over last year driven by the overall growth and strength in dealer sales. Higher credit originations, both in the United States and worldwide and effects from a continued favorable interest rate environment led to the improvement. Interest expense in the quarter declined to $6.4 million from $7.8 million in the prior year reflecting both the significantly lower debt levels as well as the continued favorable interest rate environment.

Moving to segment results. In the worldwide dealer segment, first quarter tote m net sales were up 1.8% or excluding the effect of currency 1.3% compared with the first quarter of a year ago. Importantly, this represents a continuation of the sequential improvement trend since the third quarter of last year. This significant progress is the result of the success that has been achieved in strengthening the inventory turns and financial performance of the dealer network. As noted in the press release, aggregate sales by our dealers and users, were up compared with the prior year reflecting the demand that exists for Snap-on products on a national basis.

Tools, tool storage, and hand-held diagnostics all performed well during the quarter. Outside the United States in local currencies, dealer operations reported solid sales gains in the U.K, Australia and Canada for the first quarter. Segment earnings for the dealer group were down year over year

principally reflecting the combined effects of the higher cost for continuous improvement activities in our Heritage tool facility, higher pension, and other retirement expenses, and some increase in the year over year cost for the more feet on the street program, partially offset by improved price realization. In the worldwide commercial and industrial group, sales for equipment and tools grew 11.4% in the quarter, largely benefiting from currency translation. Excluding the currency effect, sales were up 7/10 of 1%. Sales increases in equipment products worldwide partially attributable to the success of new product in wheel balancer, tire changer, and wheel alignment lines over the past three years and higher sales in our facilitation business where we provide purchasing services to new vehicle dealerships offset a decline in tool sales in the commercial and industrial marketplace, with particularly weakness seen in the aviation and other manufacturing sectors of the North America. It would appear that throughout much of the world the industrial production, and resulting demand for tools [gap in audio] the commercial industrial segments slightly lower operating earnings at $6.1 million compared with $6.6 million a year ago, largely reflects the negative margin impact from unfavorable sales mix that I previously noted as well as the effect of higher costs such as pension and other retirement expenses which offset our savings from prior year structuring activities.

In the diagnostics and information group, total net sales declined 6% for the quarter or 9.3% excluding currency effect. As you can see from the segment sales detail, this decline is largely in inter-segment sales which reflects continued week demands for big ticket diagnostics equipment for items such as large engine analyzers and air conditioning equipment in the dealer groups tech rep organization.

Operating earnings for the quarter were up. Higher year over year costs for pension and lower manufacturing cost absorption partially offset the absence of the $2.6 million receivable write down taken last year. The lower contribution from the sales volume decline largely offset the improved margin contribution from the flow of new products. Now, let me turn the discuss over the Marty

Thank you, Bill. And good morning, everyone. As Dale mentioned, two of Snap-on's major priorities are to improve profitability and enhance cash flow, driving improvement in returns Throughout the company we are making progress on all of these fronts. It is these priorities that will drive our activities over the next several years. Using lean business tools to implement lean operating practices, measuring results consistent with these priorities, and similarly linking compensation to performance, are three important elements driving desired behavior. And the measurement system is clearly showing progress. The key data points are: continued new product introductions supported by increased R&D investment, which at $15.2 this quarter was up about 4%. Permanent cost reductions through the elimination of non-value added activities. Improved productivity. Improved working investment turnover, from 2.6 times to 2.9 times. Continued improvement in cash flow generation.

And finally, improved returns on invested capital. With this emphasis however, comes some very predictable financial consequences to short-term reported profits. Specifically under-absorbed manufacturing costs, and the need from time to time to record the costs of restructuring type and continuous improvement activities. You saw evidence of these financial consequences again this quarter, as you have in prior quarters.

Let me now be a little more specific about some of these actions and results this quarter. Since Dale has already covered our new product and cost initiatives, let me move on to cost reductions. From the restructuring activities that were initiated previously, we are continuing to realize savings. Reductions in costs are being realized in our equipment, European diagnostics and power tools businesses. And additional benefits are expected from the many lean products on our calendar from the balance of 2003.

In the diagnostic and information business, we completed with realignment of production of certain European equipment lines. This action created focused manufacturing and streamline capabilities, reducing complexity, lowering inventory, and improving customer responsiveness.

In our Heritage Snap-on tools operations, a number of plants were recently realigned, so that they share certain resources. For example, the two plants in Tennessee are operated under one local management team and supported by a combined administrative team. Going forward, this reduces the indirect labor costs for those plants by more than 20%.

Unfortunately during the first quarter, savings for many of these and past initiatives were masked in our reported financial results by the combination of lower manufacturing absorption as we bring down inventories, higher expenses for pensions, post-retirement, and insurance costs. Higher U.S. dollar translation impacts on expenses, continuous improvement costs, and costs to further strengthen our franchise distribution system. Our many operational fitness initiatives have improved productivity. Sales of approximately $170 thousand dollars per employee were cheap this quarter, compared to $151 thousand last year. At the end of the quarter, total employment was approximately 12,800 down about 10% over the last 24 months.

Let me digress for a moment and give you a story and demonstrate the improvements we're making as we build the Snap-on disciplines into our operating practices. In December of last year we acquired Nexic [ph] Technologies. This largely was a produced based acquisition of assets, related to the vehicle scanner, and telematics operations of Nexic. These products gave Snap-on immediate access to the heavy duty drunk and off road diagnostics marketplace. It complimented our existing diagnostics business. Within the first quarter, these products have been integrated into our diagnostics and information group. The engineering support, customer service and other capabilities are integrated into your business operation and assembly operations and distribution are currently being moved in to existing Snap-on facilities, which essentially completes the integration. The efficacy of this integration allowed us to see some near-term market opportunities.

Now, let me switch gears and talk about working investment. Throughout Snap-on, we continue to take actions and improve working investment. These continuing activities led to the almost $21 million benefit to cash flow in the first quarter. Our target is to reach four turns by the end of 2005. When measured back from 2001, this is expected to free up $250 million in additional cash flow that can be put to much more productive uses. Through the end of the first quarter, we have freed up more than $100 million and we believe we remain on track to achieve our goal.

In the first quarter, a period in which we traditionally build inventories to support a up-tick in seasonal sales, inventory was reduced. While $6.8 million of currency effects masked much of the improvement inventories were about 368 million at quarter end, down from previous quarter end, and down about 5% from a year ago. Importantly, inventory is being reduced through better processes while order, fill rates, and services levels are being maintained or improved.

Total accounts receivable increased over year-end as $9.6 million in currency effect and $2.6 million in higher installment receivables, offset the improvement in trade receivables. Looking at it from the day's trade sales outstanding perspective, Snap-on improved by 8 days or just over 8% year over year. Our disciplined approach to spending is every bit of disciplined when it comes to capital spending, which focuses us to invested in value-added growth projects while eliminating waste.

Capital expenditures were $6.2 million for the quarter down from the $13.9 million last year. We now believe that for the full year, our capital expenditures will total approximately $45 to $50 million with about two thirds of that directed toward new products, quality, and cost reduction projects. We generated positive free cash flow of this quarter of $12.4 million after capital expenditures, and after a $10 million pension contribution. This compared to an outflow of $8.5 million in the year ago quarter.

Cash flow this quarter was primarily directed towards payments returned to our shareholders in the form of dividends and share repurchases. During the first quarter we repurchased 150,000 shares, for a total of $3.8 million. Our share repurchases continued to be aimed at offsetting dilution, rather than making large repurchases.

And finally, and very importantly, the combination of our focus on these and many other initiatives is improving our financial return. At Snap-on, we measure this as pretax or ROIC or Ronabit [ph] returned on net interests employed before interest in taxes. For the first quarter, this improved to 15.5%, up 30 basis points from year-end. Ronabit is an important component of our driven to deliver platform, as well as management’s total compensation. In light of the significant progress we have made in terms of cash flow and debt reduction, we are often asked what are our priorities with regard to investment opportunities going forward. As we said, we continue to place emphasis on accelerating internal growth. So reinvesting in such areas on our ‘more feet on the street program’, and new product innovation are priorities. Our commitment to these areas are commitment to the future of Snap-on.

Our long term net dealt to capital target remains unchanged a 30 to 35%. However, in the near term we expect that ratio to remain below 30%, even as small, targeted acquisitions remain a potential use of our cash. At the end of this quarter, this ratio was 28.6%.

Now, let me share with you some of the assumptions that we believe support our current expectation for approximately 10 to 15% net earnings growth in 2003. As we stated in our press release, while we where are encouraged by the moderation of oil and gasoline prices since February, we sill little evidence for any overall general economic improvement in 2003, particularly in the second quarter. Not withstanding that, we will continue our investment behind new product initiatives across all of our business segments. We continue to see steady sales by dealer network. Although, we will continue to emphasize improving dealer’s balance sheets. I will also remind everyone that 2003 is a 53 week fiscal year, so we will have a few extra sales days. Given these factors, we believe we could achieve a rate of sales growth in the approximate mid-single digit range for the year, absent the effect of currency translation. Albeit greater in the seconds last of the year than the first half.

Finance income is driven by the continued demand in the dealer business which drives originations and by the interest rate environment. For our planning purposes we assumed a modest increase in interest rates later in 2003. Which could dampen growth somewhat in our 2003 financial services income. We continue to benefit from lower interest rates on our commercial paper borrowings, and our lower debt levels. Given our cash flow performance in 2002 and our continual emphasis on working investment reduction in 2003, we expect full year 2003 interest expense to be lower than 2002.

Our effective income tax rate was 35% for the first quarter. And we expect that to continue through 2003. Again, I would like to emphasize that we expect the larger portion of our expected 2003 earnings growth to come in the second half of the year. Our 2003 plans are also expected to result in improve on returns on invested capital, which we believe the important driver of value creation for our shareholders. Now, let me turn to discussion back to Dale for concluding remarks.

Looking forward, we will continue to emphasize the consistent and broad application of our driven to deliver business process, and the execution of our key priorities. We will continue to adopt lean business practices throughout the organization looking for a three-fold increase in that activity. We will grow and enhance the dealer channel with emphasize not only in increasing the number of dealers but on developing stronger dealers. We will strive to improve our margins despite the weak economic environment through real cost reductions and streamline processes. We expect to lower our working investment and drive faster inventory returns and lower day sale outstanding.

Finally, we are will persist in our investment new products and anticipate rationing sales upward towards our 30% new product goal. In closing Snap-on is moving forward. Our core business is solid. And we are making progress toward becoming a more performance driven company. We have strong brands and unique competitive breaks. The long term market trends we believe are favorable, and we are well, positioned to take advantage of them. There are many attractive opportunities available to us. And we expect to enhance our returns through asset reductions, while continuing to capitalize on our strengths, to create profitable growth for the company. With that, we would be pleased to take your questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question you can do so by pressing the star key followed by the digit one on your touchtone telephone. If you're on a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. We will take your first question from Alexander Paris of Barrington Research.

Good morning. With that extra week, do you have a rough estimate of what an extra week would be at that time of the year at that time in terms of sales?

I think it would be in the neighborhood of 1 to 2% depending on the circumstances.

1 to 2% growth over the previous year would add that much?

Could be, yes.

Okay. Your pension cost of insurance and so forth the 5 million dollars, was there a bigger than usual quarterly expense there, or is that what you would expect on a quarterly basis for the full year? That is, are you spreading it over the four quarters?

As you recall from our conference call last, we talked about those expenses being up about $22 million for this year, so $5 million for the quarter is pretty much on track. And we would expect that occur fairly even which you will throughout the year.

And you were talking about the dealer's, they're showing good year over year sales growth to their customers, to their market. Can you give us an idea of what kind of year over year growth that's running for them?

I think it's back been a continuation. They're up modestly this quarter. We did have some issues as you may remember with weather in the south that did dampen it to some degree. I think that you can see from the credit originations performance, that the core underlying strength has been what we’ve seen in the last couple of quarters.

Could you give me a rough idea to your own thinking of what level of oil prices would be a problem for you in the -- during your, say your important summer driving season?

Well, fortunately well now well north of where they're at today. It's not as much as absolute dollar price level it's actually more in our mind how quickly it proves and what percent of increase that is over where you start. So as the indications that we see now and the trends that we see how, if those were to persist, we would really have a non-issue for us through the remainder of the driving season. And in addition, we're hopeful that increased amount of miles driven could result because of the reluctance of people to fly commercial airlines. We saw some evidence of that last year where people were taking driving approaches to trips under 400 miles so we would hope that that would continue into this year as well.

Your net finance income the 3.1% increase, roughly what percentage of that is from new originations versus just the lower interest rate and phenomenon?

Alex, it's Marty. Credit companies originations quarter over quarter were up about 7%. As Dale said, that shows the continued robustness we’re having in originating new transactions. The balance did come from the lower interest rate environment. Those are the two components of the increase.

Thanks

We'll go next tot Jim Lucas of Janney Montgomery Scott.

First question on the competitive environment. Can you speak a little bit on the industrial tool market which has been down double digit on top of down double digit, within the dealer group you had a little bit of turmoil with one of your competitors. And continue softness of the big ticket items can you speak to little bit to what you're seeing to a competitive landscape out there.

I'll try. From the industrial standpoint, what we're kind of seeing there is a plague on all our houses, if you will. I don't know that anybody that operates primarily in the industrial space that's having a particularly good start this year. The economic breath-holding that we’ve characterized that has gone on in industrial for the last now almost three years was actually exacerbated by the uncertainty created by the Iraqi circumstance and some of the pricing we talked about earlier. It's really difficult to see what catalyst is on the horizon that’s going to galvanize that unity to get back to what I would call a more normal replacement cycle. But I don't see any share gains from a competitive standpoint that are going on in that segment. I think it's a rough show for everybody.

In the dealer group, you're right. There has been a lot of activity in that of recent vintage. We are being patiently, kind of considering what the potential ramifications of those changes are for us. There's really no hard and fast direction I can give you on that except that I think from our perspective a continuation of the programs that we've already initiated should allow us to take advantage of any of those opportunities that may come our way. Obviously when you have a disruption on a part of a competitor, it can be a favorable circumstance. But I would be hard pressed to think that that's going to be a meaningful benefit for us in the short term.

Okay

Equipment that is again we're now in the fourth year of difficult economic times in that segment, and it continues to amaze us how the end users, our ability to defer purchases. As we’ve said many times, the average useful life for equipment is about 7 and a half years, and we’re about four years in to this downturn. It's just remarkable that they continue to shove business away in spite of the fact that the activity in the shops we continue to see is strong. People are getting their car fixed, they’re spending money on that. So this connection between their ability to go back and expand on capital versus intrinsic rate of business in their shops continues to kind of vex us and I think most everybody in that space.

Okay. And then if we switch gears clearly the improvement on the balance sheet and cash flow in the first quarter we're beginning to see the improvements of the driven deliver program organization. But we're hearing about the continued costs, I guess, a bit ironic to say, continuous improvement costs but clearly there’s the investment up front. At what point do you foresee that we will no longer be talking about this in quarterly conference calls?

Again, what we're attempting to do is show out to your point, and the term we’ve used is continuous improvement cost. I think the familiarity you have with what we’re trying to do here as far as lowering our break-even on a lot of our business, results in impacts such as that what we've seen in this last quarter. I think we said earlier at the beginning of the year that we may see $2 to $3 million for this quarter. For this full year, I would say that estimate’s probably still accurate. But beyond that, again, if we have a little volume to provide some high cover, you wouldn't see that flowing through the P and L. It would also make our life a little interesting and a little less challenging. But I think it’s going to be a regular part of our business, and in my mind it’s more evidence of our willingness in spite of the short-term impacts that has, to do the right thing for the long term. Because these are structural reductions, that will pay benefits when the volume returns.

On the cash flow thing, you talked about some of the areas of where you're looking to focus. You know, it was good to hear the steps taken with the Nexic acquisitions is actually here. Some of the integration activities have taken place, which we haven’t necessarily heard in the past at Snap-on. At what point do you foresee the acquisitions program picking back up?

Well, we're always open to opportunities that respect out there. As you know, we don't dictate the timing on many ideas. But as we’ve said many times, our current focus right now is to get the current base business stabilized and on the right track. Clearly the performance in the first quarter would lend one some evidence that that is occurring, but we still have work to go in that regard to make us feel more comfortable. Obviously that coupled with a bit more certainty in the outlook in the future relative to the economic situation would be a benefit as well. In light of that we're going to be marshalling our forces, again focusing on the things we can see touch and feel, and try to drive the improvements on those internal processes and cash flow so we have some opportunities in the future that maybe we can take advantage of. So I don't know that you would see a whole lot of increase in activity based on that. Probably into late this year or more likely 2004.

Okay. And final question on just a little granularity on the second quarter outlook. Would you expect to flat to modestly up or could we see a potential small year over year decrease and to what number are you comparing that a year ago?

Let's talk about that. First of all, we're not on this call providing any specific EPS guidance for the second quarter. And probably won't do so for succeeding quarters as well.

Okay

I think you should see in our press release. Be very open in our communications. You used the word ‘granularity’, I would like to think for those and others, that really want to get into some of the numbers and the trends and the impacts, we provided all the specificity with quantification that one could want. We'll make an effort to continue to do that, we’ll make an effort through Dale, Bill and others commune indicate our strategies and priorities. Those have been real clear around driven to deliver. And then allow those of you who have followed the business who understand some of the seasonal trends of the business, I think understand the potential impacts of what our strategies and priorities could or could not mean around the numbers together with I think some of the things we're creating the baseline through the analytics and disclosures and press release leave that up to you folks to do that. Continue to look out over a longer period of time, like the balance of this year, and at least give you perspective of where we think the full year may come in.

Okay. All right. Thank you.

We'll go next to David Leiker with William Baird.

Couple of questions here first. On the inventory worked on in the press release you said $4.4 million, is that the impact of Snap-on reducing inventories, or is that the impact of dealers reduces inventories, or both?

It's a little mixture of both. I would say that predominately, it would be our inventory internal, if you will, that caused that. As we said before, the dealers are still rationing theirs down. We took some I guess you could call them aggressive steps down this year to avoid a bulge by letting the production continue unabated. So most of that I would have to term as self-inflicted.

Will we see that kind of number through the balance of the year?

I hope not. Some of the restructuring actions we've taken this last quarter and in prior quarters, we would hope it would ameliorate the need for that. Again, we don't know with perfect certainty what the economic forecast and net results are is going to be out there. We would hope this would be an anomaly for the remainder of the year, but can’t we can’t make any promises given the uncertainties.

And then the dealers working on inventory, is that something that expect to see in Q2. Do you think that carries on through the rest of the year?

Yes that would I think, but in a moderating fashion. As you may remember we started to aggressively pursue that around the end of the second quarter last year and we'll be coming up on that anniversary in August. We started to see graphic evidence of the change. I think you will see that moderating we're hopeful that we it will get some uptick in volume that will make it much a easier transition

Okay. That sounds great. And then I messed a comment on the dealer's side in terms of end demand. It sounds like it's weather related, do you continue to think that will steady through the balance of the year

Yes, we do. I think you characterized it accurately. We don't see any change in the core underpinnings in that performance at all except for the weather notation we made. Again, originations is best thing I condition point to David that say where the strike’s still there. Obviously, we would like to see the equipment business back given the break in the weather now. But it’s been a long time coming. So it's tough to get excited about predicting that.

And lastly kind of a bigger picture item, on driven to deliver, it’s been maybe 18 months since you ruled that out through Snap-on. Are you at the stage now where people are living that or are you still in the teaching and learning stage?

I think it's a bit of a mix right now. In the next few weeks we're going to head in our to our LRP planning cycle. And I will be able to give you a much better estimation post that. The indications I see doing a lot of walking around and visiting a lot of sites in the last few months lead me to believe that it is sticking if you will. I see a lot more graphic evidence of people taking actions unilaterally based on an understanding of the principles and the need to apply them so I'm encouraged in the progress that we're making. I wouldn't declare victory at this point. But I think we're well over the mid range hump. And again, I will know a lot more once we complete this long-range planning cycle

Thank you.

Michael Prober [ph] First Capital has your next question.

I have a couple of quick questions in the cash flow statement. It shows a on a gain on market to market in cash flow hedges. Can you tell me what that is?

Let me get my cash flow in front of me here. I mean, you know, under GAP we have to mark to market hedges derivative contracts. But here but because there's no cash flow, it's just a mark to market accounting. You see a deduction there, so the mark to market impact is included in earnings. It's simply a mark to market impact. So we eliminate it in the cash flow statement to get the true cash flow.

Is that for interest rate hedges?

We have some interest rate swaps that you'll see disclosed in annual report.

So last year you lost $.1 million and this year you made $800,000 in the quarter on the swaps?

Yeah, swaps. I don't have all the details in front of me, there could be some other foreign currency derivatives, but the impact of that on the cash flow is clearly to adjust net income up or down for the non-cash flow impact of the mark to market accounting.

On the –balance sheet, the pre-paids were up pretty substantially. Is there any capitalized software. Is there anything that's going on there?

I think probably mostly, it should make sense, we prepaid our insurance policies for the year. And as we said insurance costs are up, and you may your policies once a year. And amortize that prepaid over the balance of the year.

And in the finance subsidiary, can you talk about equality. I know last year it looks like the allowance for that account, basically the credit charge rep provision. How is has that been trending? Have you seen a kind of stabilization of the credit consideration that was last year and talk a little bit about that please? Thanks.

Sure. Actually, we're very pleased. Recent data out of Snap-on Credit Corporation actually showed improvement in loss and delinquency statistics given the economic environment, we're actually very pleased about that and we any we have a very diligent people over on at Snap-on Credit who monitor that very closely.

But the change you are seeing, you didn't change the assumptions within the finance business such that the earnings would increase?

No.

Thanks very much, guys

David MacGreggor [ph] of Longbow Research has our next question.

You talked about the new product as a percentage of sales. I was just wondering if you would perhaps let us understand your bottom line contribution from new product development program.

As you knew, we're striving to shoot for 30% of your sales to come from products less than 3 years old. And we have a tough definition of what constitutes a new product so we don’t confuse ourselves with counting something that’s a line extension if you will with a true new product. We're always looking for the incremental benefit of a new product. Relative to the bottom line, we also take a look at new products as an opportunity to have margin expansion. Anytime you replace a new item observe add a new item, you kind of recreate the opportunity to price that product to the market. On average, most of our new products are net margin improvers upon predecessors. Small larger than others. Some small material events if you will, but it depends on the circumstances of the item. But general comment would be that they tend to be a benefit at the gross margin line as well as the top line.

Could you also give us a sense how quickly they become profitable? What is the start-up cost absorption delay?

Again that depends on the product, as you’d imagine the profile is much different if you’re talking about the software for a scanner update versus a hard tool, or a new air tool. Most of the payback periods are rather short. You're looking at one and a half to two year period. Some of the longer terms investments in software would change that amortize amortization maybe a little longer, towards a three year period. But in the main, most of our paybacks are fairly attractive.

Can you help us understand over the next three quarters, I guess through the end of the year, how the contribution at the bottom line in new products might change?

That depends a large part on the economy. I think we've seen as I mentioned in some of my comments, some gains in participation in certain product categories because of the advent of new products. Probably the easiest one to point out there would you be our tech wrench.electronic torque instrument, which actually has created a whole new segment in the torque instrument area. It's pretty tough [gap in audio] to judge whether that will be a change given the downward effects. But on the main, as I said being 23% of our sales last year, we’re darn glad we had them and we're trying to move tough products will sell even in tough times as long as they improve productivity.

Thanks very much

Jon Steinmetz of Morgan Stanley.

Few questions you’ve talked about growth and markets inventory reduction at the dealer level. I'm just wondering if you would quantify those precisely. What was end-market sales were up in the quarter, and how much do you think dealer inventories were down?

We don't have any direct information on either of those numbers. They're kind of our quest estimate based on a lot of indicators that give us some little insight own what's going on. I think the intrinsic rate we said in the past has been low single digits. I would say that that would continue into the first quarter from a user-demand standpoint. Again, ameliorated by the weather impact which was fairly sizable. I think that underlying low single digit assumption is probably good. On the dealer inventory sides, we never really provided that number. And it's pretty tough to do with the state of them owning their own inventory and not showing us 100% of their information. But I think the trend there is clearly down as we're seeing them doing a much better job of managing their inventory.

Second question. You gave the FX impact on revenue and some of the operating expenses, do you have an overall impact on operating income due to FX?

It was bottom-line translation improved earnings by a penny a share.

That was the translation. But do you have higher cost of goods in euro terms that would have impacted that cost of sales line item?

Sure. Sure. And we have European businesses that manufacture some products and currencies that appreciated [ph-audio gap] and sell them in currencies which depreciated. There are some transactional impacts. But you are correct, there are other transactional impacts.

Do you have an aggregate number for those transactional impacts?

No, we don't.

Okay. Final question would be do you have a level for annual turn over year over year in the dealer base and how that would compare to sort of prior levels?

You mean the actual dealer segment inventory return?

I'm sorry. Turn over in the actual dealers.

I'm sorry. I thought you were back on the asset--

No.

Yeah. I think it's not complete today. But it's up slightly as we said before we had accelerated levels of turn over around 10% range the last couple of years as a result of the dealer improvement programs. We don't anticipate that staying at that level. And I think our normal intrinsic rate of turnover is somewhere down around 8%.

Thank you very much

And we we'll go snow top Fred Speese of Speese Capital.

You mention pricing improvements in your divisions. Can you quantify how much you're talking about?

Yeah. It's Bill. We had a little bit less than 1% effective price realization with most of that coming actually in the dealer group which is what you would expect. We had price improve in all three segments to a very small degree.

Market share gains anywhere. It's tough in this market? Since sense you're getting vary anywhere?

Yeah I sense, you know since we don’t have hard data on share, it's tough to comment. But I think the secondary data says that we're at worst holding and at best gaining in all of the units.

I knew you're reluctant, and you don’t have to give the dealer inventory because that’s obviously an important factor—in the first quarter, was the dealer inventory contraction, whatever the number, my impression it's like less than half of what it was in the second half of '02?

It's hard to say. There are so many factors and moving parts to that. I think we think it declined modestly to your point. It probably was less than the fourth quarter. But again, given the differences in product demands and different things that we sell and new products, etc., there's a lot of moving parts there that can mask what's truly going on. The way I would characterize this and for you and for fundamentally everybody on the call is, this is going to be a topic of conversation and be with us for quite a long period of time. We did have a significant impact last year. Which we said at the time we thought would soften over time. I think that's what we're seeing. But I think the continual trend if you will over the next several quarters will be us focusing on how we make our dealers more efficient, more productive, and make sure their asset intensity is getting them where we want them to be. And I think that's going to be with us for quite some time. So it's still in our opinion on that track we were happy with the results from the quarter and we're encouraged by the opportunities that we’ve had for the rest of the year.

When clarity reappears for all of us. And you get sort of mid cycle, through all the restructuring you've done, what kind of margin improvement over the last, you know, mid cycle would you expect? You pick the margin or return on capital. Your earnings leverage should be significantly higher. Do you have a figure on that where you're think you're going to go?

I don't know if we want to be that specific where the number would be. I think your point is clear though, that given the actions that we've taken and as Dale has said, when business conditions improve and when volume returns, we would expect to see some positive operating leverage.

You're talking 100 or 200 basis points?

I think we’ve said in the past that as far as our goals as far as driven to deliver results to get for example the dealer group back to its traditional operating profit range of 12 to 14%. And our goal is to get the remainder of the business to 10% OP target. I can't predict when and for you how that will happen. Those are the goals we have set for ourselves.

Okay. Thank you

That concludes the question and answer session. Mr. Pfund, I will turn the call back over to you for closing remarks.

Thank very much for everyone to listening in. Should you have any further housekeeping detail that come up later on, I will be around my office for the remainder of the day to take anybody's phone calls. Thank you very much.

That concludes today's conference. Thank you all for your participation.